Regulators could delay Reuters deal for a year

The proposed creation of the world's largest financial information provider through a combination of Thomson and Reuters could face a regulatory inquiry lasting up to a year.

Thomson has proposed an £8.8bn deal to buy Reuters, which would create a global financial information powerhouse.

Shares in both companies were boosted late last week when Thomson, the Canadian media giant, agreed to sell its education division to the private equity companies Apax Partners and OMERS Capital Partners in a deal worth $7.8bn. Analysts had predicted the division would fetch $6bn. The sale increased confidence in the Canadian company's ability to pull off a deal after two years of negotiations to buy the British media company. Although many details are yet to be thrashed out, a formal offer could come as early as this week, with the company confident it can surmount potential regulatory scrutiny in the US and Europe.

The Reuters Founders Share Company, an independent body which acts as guardian to the editorial independence of the group, is likely to give the green light to the tie-up. The trust, made up of 15 independent executives, is believed to be satisfied that the takeover of Reuters will not jeopardise its principles of journalistic independence.

A merger of the second and third-largest financial information providers would provide the combined company with a market share of 34 per cent, leapfrogging the current market leader, Bloomberg, with 33 per cent.

Analysts consider the two companies a good fit as Reuters and Thomson dominate in different areas. Paul Richards, an analyst at Numis Securities, argued that geographically, Thomson is strong in the US, while Reuters has a more solid presence in Europe and Asia. In terms of end-customers, Thomson dominates the investment banking and wealth management markets, while Reuters is much stronger in sales and trading products, specifically in foreign exchange and equities.

However despite the fit between the businesses, Mr Richards argued that "inevitably the deal will be investigated, which could possibly take between nine and 12 months". He said that the strength of the combined business in the US is likely to be the main area of concern. Two years ago, the US Department of Justice scrutinised Reuters' acquisition of Telerate, a much smaller deal in terms of market impact, and surveyed customers of the companies to gauge the impact of the merger.

Regulatory action will also depend on how vociferously customers of the companies complain about the reduction in competition, with reports that some banks have expressed concern that the merger could reduce price competition.

Anthony de Larrinaga, an analyst with SG Securities, said the length of any regulatory inquiry would depend on the scope of the investigation. He said that regulators are likely to focus on the reduction in competition and what effect that could have on pricing and smaller competitors. "This deal would create an effective duopoly, with Thomson-Reuters and Bloomberg controlling over two-thirds of the market," he said.

It is likely that regulators will review how the deal will reduce competition due to concerns over the merger's impact on smaller data providers. For example, Reuters and Thomson are the two largest distributors of Dow Jones Newswires content but the merged company could look to sell Reuters content instead.

The National Union of Journalists has expressed concerns about job cuts following the deal, which should realise more than £250m in cost savings. Reuters employs 16,800 staff in 200 offices around the world, while Thomson's financial arm has 9,300 workers in 37 countries.